Property in the GO [Gulf Opportunities] Zone

There are three tax credits that are significant for commercial property owners in the GO Zone.

  1. Rehabilitation Tax Credit
    1. This credit does not apply to new construction.
    2. A taxpayer may deduct 13% of the cost of rehabilitation costs.
    3. The building must have been in use before August 29, 2005.
    4. Work must be completed within 36 months.
    5. Work must begin by August 15, 2006.
    6. The cost must be greater than $5,000.
    7. 75% of the external walls must be retained. It is not clear whether the external walls may be refinished, but I presume than damaged panelling may be replaced and damaged brick rebricked.
  2. Increased Section 179 and also the extra 50% depreciation allowance
    1. This credit may apply to new construction.
    2. The increased section 179 deduction and the extra 50% depreciation deduction do not apply to the building itself.
    3. They apply only to the following types of property:
      1. 20-year property--(rare) municipal sewers.
      2. 15-year property--land improvements such as sidewalks, roads, driveways, fences, landscaping; service stations
      3. 10-year property--(rare) single-purpose agricultural structures such as silos, feeding bins, etc.
      4. 7-year property--furniture, fixtures, equipment
      5. 5-year property--computers
    4. Usually a taxpayer may deduct all in the first year 100% of these costs up to $108,000. For the GO Zone for the years 2006 and 2007, this limit is increased to $208,000.
    5. After taking the Section 179 deduction and subtracting it from the cost, a taxpayer may in addition deduct half of the remaining cost.
    6. The taxpayer is not required to take the Section 179 deduction.
    7. COMPREHENSIVE EXAMPLE: from IRS Publication 946 (year 2006), page 31:

      On November 1, 2006, Tom Brown bought and placed into service in his business qualified GO Zone property that cost $305,000 [The property cannot be a building]. Tom elects to deduct $208,000 ($108,000 + the increased dollar limit of $100,000 for qualified GO Zone property) of the property's cost as a section 179 deduction. He uses the remaining $97,000 of cost to figure his special depreciation allowance of $48,500($97,000 x 50%). He uses the remaining $48,500 of cost toe figure his regular MACRS depreciton deduction for 2006 and later years.
  3. Removal of debris or demolition
    1. This deduction is not as valuable as the other two, but occasionally may be needed.
    2. This deduction is for business properties only.
    3. 50% of the cost of debris removal or demolition may be deducted as a current expense.
    4. Usually the cost of demolition must be added to the cost of the new building and depreciated over 29-1/2 years.
    5. Congress did not think this deduction through before enacting it.
      1. The entire cost of debris removal is deductible under another deduction that existed before this special rule.
      2. The decrease in FMV (fair market value) to a property because of a storm or other disaster is deductible.
      3. For example, if a property is worth $400,000 before the storm and worth $75,000 after the storm, the deduction is $325,000. In figuring the decrease in market value, the taxpayer may consider how much he would have to reduce the cost of selling his property because of the cost to remove debris.
    6. There is a catch. The decrease in FMV is limited to the original cost less prior depreciation. In the above example, if the property originally cost $100,000 and the taxpayer had taken $60,000 depreciation, then the decrease in FMV would only be $40,000 ($100,000 less $60,000).
    7. In this case, the 50% of debris removal deduction could be important as a way of partially getting around the disappointing decrease in FMV deduction.